From: James Angel [ANGELJ@georgetown.edu]
Sent: Wednesday, January 08, 2003 7:48 PM
To: rule-comments@SEC.GOV
Subject: File No. S7-40-02: Comments on definition of Financial Expert
for section 407

I would like to add my comments to the discussion of the definition of a 
"financial expert" under the proposed rules implementing the requirements 
of section 407 of Sarbanes-Oxley.

The Act requires companies to disclose whether they have a "financial 
expert" on their audit committee and, if not, explain why not.   The 
general intent of this section seems pretty clear to this non-lawer:  
encourage companies to put skilled people on their audit committees who 
can prevent a recurrence of the recent shenanigans.  We need directors 
who have enough financial savvy to understand complex financial 
transactions, enough accounting knowledge to monitor the quality of 
the accountants' work, and enough intestinal fortitude to speak out 
if there is a problem.  

I suspect that Congress was thinking about an expert in the spirit of 
the common usage of the term.  A typical dictionary definition of "A 
person with a high degree of skill in or knowledge of a certain subject. " 
(American Heritage Dictionary, 4th Edition)  However, this definition is 
clearly not precise enough for regulatory applications, so the Act also 
directs the Commission to define "financial expert" and provides a list 
of criteria for the Commission to consider in making the definition.  

Although Congress listed a number of things to consider, Congress wisely 
recognized that its consideration list was not necessarily the only or 
best route to a definition and delegated the actual definition to the 
Commission.  Congress also did not specify that only those fulfilling 
the conditions stated in the language of the act could be considered 
experts.

The proposed definition appears to be exceedingly narrow and will leave 
out many people with a high degree of skill in or knowledge in this area.  
The proposed definition will exclude many people with the kind of skills 
that Congress wants to see.   I find it ironic that the proposed definition 
would not include some of the best financial experts such as finance 
professors.

Even though the proposed definition leaves some wiggle room by allowing 
the board of directors to accept "similar expertise and experience," it 
is not at all clear what will be considered "similar expertise and 
experience."  

Furthermore, the small pool of potential candidates that fit the narrow 
definition of financial expert may have a perverse effect.  Companies may 
feel forced to elect or retain individuals as board members who meet the 
narrow definition, even though such individuals may not have the general 
intelligence, business acumen, or up-to-date skills desired for such a key 
position.   In this way adopting a narrow definition may actually decrease 
the quality of board members, which is exactly the opposite of the intent 
of Congress. 

The knowledge needed to serve effectively as a board qualified "financial 
expert" can be obtained in many different ways, through education as well 
as experience.  Although experience is a great teacher, experience alone 
may not prepare a board director to do the kinds of things wished for by 
Sarbanes-Oxley.  Indeed, a potential director with years of experience 
with a company where there was no fraud and no accounting irregularities 
may be particularly unequipped to recognize or expose the kinds of problems 
that led to the passage of Sarbanes-Oxley.  Such a person may be so used to 
trusting the assertions of management that they don't even think to look 
for or question inappropriate accounting. 

I suggest that the definition be widened to permit education to be used as 
an additional qualifying criteria.   Furthermore, experience as a consultant, 
expert witness, or financial educator should also be considered.    The rule 
could also specify what kind of education might qualify a potential board 
member as a financial expert.

The current proposal mentions professional credentials, but does not provide 
a list, which will lead to great confusion.  The proposal should clearly 
list certain professional credentials as evidence of being an expert.  For 
example, the CFA (Chartered Financial Analyst) charter is one credential 
that is highly respected as a sign that the charterholder has passed several 
rigorous examinations and fulfilled work experience and ethical requirements.  
(For more information on the CFA program, see www.aimr.com.)

I recommend that the commission add several alternate classifications 
including:

1) Recognition as a financial expert by a court of law.
2) Experience as a professor of finance or accounting.
3) Holder of a CFA charter.
4) Graduate of an executive education program that covers audit 
committee requirements.



James J. Angel, Ph.D., CFA
Associate Professor of Finance
McDonough School of Business
Georgetown University
Room G4 Old North 
Washington DC 20057 USA
1.202.687.3765 (voice)
1.202.687.4031 (fax)
angelj@georgetown.edu